Firms smarting from credit crunch turn to Asia

DESPITE ASIA’S reliance on the US markets, our eastern peers look less likely to be affected by the US credit crunch than our western counterparts, local firms have claimed. As debt becomes both

DESPITE ASIA’S reliance on the US markets, our eastern peers look less likely to be affected by the US credit crunch than our western counterparts, local firms have claimed.

As debt becomes both expensive and a rarity to find, in the height of the international credit crunch, mergers and acquisitions (M&A) work is facing a downturn.

Simon Milne, an M&A partner in Mallesons Stephen Jaques’ Hong Kong office argues, however, that Asia is less likely to be affected due to the very nature of it attitudes to M&A deals.

He told Lawyers Weekly that M&A in Asia, with the exception of Hong Kong and Singapore, is largely private M&A, and much less listed company transactions, than is the case in Australia. While he admits that a big downturn in the US will hurt them, Asia is more resilient than the West in M&A work.

“The transactions we do here are much less likely to be affected than in Australia and the western world,” he said. “Asia is seen by all major law firms, and more importantly by the financial sponsors, as an area of major growth.”

Financial sponsors, primarily the private equity players, the hedge funds and the sovereign investment funds, have raised a lot of money between 2005 and last year specifically for investment in Asia, Milne said.

“So you have these cashed-up funds ready for investment into Asia. Some of them, like the sovereign investment funds, have trouble because we’re very suspicious in the West of sovereign investment funds. In Asia you don’t get the heavily-leveraged, private equity-focused M&A that you get in the US,” he said.

Asia rejects a culture of leveraged buy-outs, where organisations raise debt in order to buy out a company. Milne says that it’s difficult to take a majority stake in Asia, as from a regulatory point of view it’s not possible. But also, he said, a lot of businesses are owned and controlled by families, and closely knit groups or affiliates.

“You can’t just make a takeover bid and acquire them. As a result of that, you don’t really have a lot of debt in minority investments, so the private equity players usually go in to a company that plans to float a year or two before they float and then they benefit from it,” he said.

Asia has avoided some of the debt problems of the US because of this tradition of less debt in acquisition, said the Mallesons partner. “The result is that we don’t have the same debt problems in Asia. There is a lot of cash here and the evidence of the market is that there is no throw-down expected in M&A and IPOs. Generally IPOs will largely continue,” he said.

“The one difference between Asia and the rest of the world is that our M&A is going great guns. That is pretty good news for the Australian law firms that do a lot of work in Asia,” he said.

His words echo those made by KPMG UK partner and international chairman of corporate finance, Stephen Barrett, who predicts a slowdown in international M&A, tempered only by the fact that Asia is more buoyant.

The latest version of KPMG’s Global M&A Predictor provides further evidence that M&A activity has now reached a plateau and could be in decline in some areas. Barrett anticipated, however, that any slowdown would be a “fairly gentle, gradual one”.

But the Asia-Pacific region is bolstering overall numbers, according to the KPMG figures, leaving a mixed outlook globally. “Where there is appetite and confidence, there are constraints such as a lack of funds or suitable targets. Where there is cash, there is nervousness, caution and a slight loss of appetite,” Barrett said.

“Overall though, deals will still be struck. Working from corporate balance sheets which look marginally healthier than they did six months ago, companies will be able to put together intelligent deals if they can rally investors and the market into creating bold and imaginative, value-enhancing transactions,” he said.

“Indeed, falling valuations and strong balance sheets could mean that 2008 becomes the year for acquisitive companies to consider consolidation and diversification deals.”

Julian Vella, KPMG’s corporate finance chairman for the Asia-Pacific region, also highlighted the buoyant Asia-Pacific M&A market. “We can therefore expect the largely untapped potential of regional and sector consolidation to continue to drive healthy corporate deal-flow, particularly in financial and consumer services, and in industrials where we expect several medium-sized as well as some mega-deals to be done,” he said.

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